The dream of many cleantech entrepreneurs to take their startup public is just that these days —a dream.

But innovation among companies in the business of renewable energy, alternative transportation, energy efficiency, water treatment and any other number of other green technologies nonetheless remains on a tear.

Many companies have matured to the point that they have products and services and in trying to grow that business further are now turning to mergers and acquisitions.

“You will likely see corporate M&A rather than IPOs,” said Garrett Herbert, partner, M&A transactions services group at Deloitte & Touche.

Through the third quarter, 580 cleantech companies around the globe merged or were bought out in deals totaling about $27 billion, compared to the 64 companies that raised $5.27 billion in IPOs, according to the Cleantech Group and Deloitte & Touche. Although M&A volumes slipped in the fourth quarter, Herbert expects volume to pick up in the fourth quarter.

Though the difficult market for IPOs for most of the year has been a factor, the cleantech M&A trend reflects the need of companies to incorporate clean technologies into their own business strategies. Sectors likely to be critical in the future, such as water management or the power grid, are attractive acquisition targets.

Corporations “care about cleantech in a meaningful way and they are looking for growth,” said Shareez Haji, president of the Cleantech Group. “They see cleantech as one key area where they can play a big role.”

Alan Salzman, CEO at VantagePoint Venture Partners—a venture capital firm, that has worked alongside corporations as an investor in cleantech startups—agrees.

“I think there is a fascinating dynamic that will unfold in the cleantech sector where you have lots of companies creating novel and very valuable technology and a lot of large companies watching these developments that have the potential to become quite acquisitive," says Salzman.

At the same time, many cleantech businesses need the deep pockets, alliances, marketing capabilities and reliability of a larger player to grow their businesses on a scale that can’t be provided by the public markets.

They bought companies that added or complemented their own capabilities, and in many cases they offered the small startups the capital and market access they needed to get to the next level.

Mergers and acquisitions among cleantech companies soared in the first quarter of 2010, and then fell off. But aquisitions are expected to rise in the fourth quarter.

Access to Capital

Such was the case with CPower, an energy management company, bought by Constellation Energy [CEG 28.85 -0.09 (-0.31%) ] earlier this month. CPower works with retail and industrial customers, paying them to reduce their load on the power grid during peak times, so that other customers can have more power when they needed it, a strategy known as "demand response."

"Our ability to manage that and provide a variety of financial vehicles for maximizing that value is what’s valuable to our customers," says Gary Fromer, CPower's former CEO, now a senior VP at Constellation. "It would have been a high risk proposition to take through an IPO process, and then we’d still be years away from the necessary and right balance sheet for being in this business."

For Constellation, the acquisition allows the energy giant to boost its demand-response capabilities from 650 megawatts to 1,500 megawatts and brings the company into new markets, including Texas and Ontario, Canada, according to Peter Kelly-Detwiler, senior VP of energy technology services at Constellation.

Constellation also gains access to CPower's technology for communicating with customers, which it is being married to the existing one.

Recurrent Energy, which develops solar projects that can be plugged into utilities for residential and commercial use, sought out a takeover in May when CEO Arno Harris realized Recurrent would need more money than its private equity funder, Hudson Clean Energy Partners, could provide.

“We realized we would really need to make a move to the next level of capitalization of the company and that our needs would outstrip Hudson’s depth, and we decided a strategic sale was the best path for us,” Harris said.

Recurrent hired Morgan Stanley as an adviser, and by September, Sharp, the Japanese electronics company, which makes solar modules and cells, acquired the firm for $305 million.

Cleantech startups are also likely M&A targets for corporations that haven’t invested the research and development into emerging technologies that they’ll need to be competitive, says Neil Suslak, managing partner at Braemar Energy Ventures.

A good example is companies that weren't prepared for state regulations requiring utilities and energy companies to boost the amount of power they get from renewable resources.

“Because they have to get in alternatives, they have to increase their investment by either investing in emerging companies with new solutions or buying them outright," says Suslak.

Still other companies are sizing up cleantech innovations and businesses through smaller investments and strategic partnerships that market participants expect will result in acquisitions.

“Word is it’s great for TSMC,” says Brian Goncher, director of the U.S. Clean Tech practice at Deloitte, said. “It’s likely they would buy it going forward.”

Several other interesting partnerships came together in 2010. Unilever made a multi-million dollar investment in Solazyme, which is working on making soaps and lotions for Unilever out of algae. Chevron Technology Ventures, a unit of Chevron [CVX 85.588 0.148 (+0.17%) ], has also invested in the company, as Solazyme's products can also replace petroleum.

In addition, Waste Management [WMI 0.08 --- UNCH ] invested in Enerkem, a company that turns garbage into biofuels, and ABB [ABB 20.65 0.06 (+0.29%) ] and GE invested in Trilliant, a company that provides utilities with wireless equipment and management software for Smart Grid networks.

“You are seeing a number of larger corporations being active,” says Salzman at VantagePoint. “That is also very often a good indicator that you are likely to see M&A.”